1.

Meaning of Franchise

 A franchise is a business arrangement where a successful business (the franchisor) gives

another party (the franchisee) the right to operate under its trade name and system.

 The franchisee pays a fee to use the brand and receives support in areas like marketing,
training, and systems.

 The word “franchise” comes from French affranchir, meaning “to free.”

 It's a contractual agreement involving mutual benefit and support between both parties.

 In India, franchise agreements are governed by the Indian Contract Act, 1872.

2. Features of a Franchise System

1. Two Parties – Franchisor and one or more franchisees.

2. Written Agreement – Legally binding document detailing roles, rights, and duties.

3. Exclusive Rights – Franchisee gets rights to use the brand in a defined area.

4. Payments – Includes:

o Initial license fee

o Regular royalties (percentage of sales/profit)

5. Support – Franchisor assists with:

o Marketing

o Equipment and setup

o Training

o Record keeping

6. Restrictions – Franchisee must follow rules, can't share trade secrets, and must not start
competing businesses.

7. Specified Duration – Typically for 5 years; can be renewed.

3. Types of Franchises

a. Business Format Franchise

 Most common type.

 Franchisee gets the right to use the entire business model.

 Includes brand, training, layout, service standards.

 Example: McDonald’s, KFC, Domino’s.

b. Product Franchise
  Franchisee is allowed to sell branded products.

 Often in retail, with control over how products are sold.

 Example: Reebok, Bata, Arrow.

c. Manufacturing Franchise

 Franchisee manufactures goods using the franchisor’s brand.

 Example: Bottlers of Coca-Cola, Bacardi (Gemini Distilleries in Goa).

d. Business Opportunity Venture

 Franchisee buys products and is given customers/accounts.

 Example: Coffee vending machines.

4. Laws Governing Franchising in India

India lacks a specific franchise law, but the following laws apply:

1. Intellectual Property Law – To protect brand identity and product features.

2. The Trademarks Act, 1999 – Ensures protection of brand names and marks.

3. The Designs Act, 2000 – Protects product design and appearance.

4. The Copyright Act, 1957 – Protects training manuals and materials.

5. Labour Laws – Apply to employee rights, especially when outlets shut down.

5. The Four Ps of Franchising

i. Product

 Franchisee must maintain high quality.

 Product must meet current and future customer needs.

ii. Process

 Includes branding, training, management, accounting, and customer service.

 Must follow the franchisor’s procedures.

iii. Profitability

 Understand costs:

o Start-up

o Goods and labor

o Franchise and royalty fees

 Ensure long-term profitability.

iv. People

 Employees are key to success.

 Franchisees must lead by example to build a motivated team.

6. Key Terms in a Franchise Agreement (Checklist)

Franchise Costs

 What does the fee cover (inventory, setup)?

 Is the fee refundable?

 Payment terms: lump sum or installments?

 Royalties: percentage, how paid?

 Are advertising, accounting, and training included?

 Financing available?

Location Terms

 Who picks the site?

 Is territory exclusive?

 Can other franchisees operate nearby?

7. Viewpoints of Franchisee and Franchisor

Franchisee’s View

 Leverages established brand and system.

 Receives ongoing support and training.

 Reduces business risk.

 Easier access to funding.

Franchisor’s View

 Expands market without major investment.

 Uses local expertise.

 Manages manpower locally.

 Builds brand and gains market feedback.

8. Master Franchise Model

 A master franchisee is granted rights to operate in a region.

  Can open multiple outlets or sub-franchise to others.

 Offers local control and faster growth.

9. What Entrepreneurs Should Ask a Franchisor

1. 3 years of financials.

2. Initial and ongoing costs.

3. ROI estimates.

4. Sales, cost, and profit figures.

5. Support and services provided.

6. Legal agreements.

7. List of other franchisees.

8. Site selection rights.

9. Brand management and training structure.

Note: Agreements should be reviewed by a lawyer or CA before signing.

10. Franchise Ownership Models

Model Ownership Operations

COCO Company-owned Company-operated

COFO Company-owned Franchise-operated

FOFO Franchise-owned Franchise-operated

FOCO Franchise-owned Company-operated

Quick Summary of Each Model:

 COCO (Company-Owned, Company-Operated)

The company owns and directly runs all outlets. Often used for testing and maintaining
complete control.

 COFO (Company-Owned, Franchise-Operated)

The company owns the outlet, but operations are handled by a franchisee. Collaborative
control.

 FOFO (Franchise-Owned, Franchise-Operated)

Most common model. Franchisee owns and operates the outlet independently under
franchisor guidelines.
  FOCO (Franchise-Owned, Company-Operated)
Franchisee invests, but franchisor runs daily operations. Ensures consistency in brand
standards.

11. Steps to Set Up a Franchise

1. Research & Selection – Match your skills to the opportunity.

2. Due Diligence – Review legal and financial info.

3. Financial Planning – Budget for setup, fees, and operations.

4. Legal Agreements – Understand all obligations.

5. Training & Setup – Learn business model and follow brand standards.

12. Advantages and Disadvantages

For Franchisor

Advantages:

 Low-cost expansion.

 Regular royalties.

 Enhanced brand recognition.

 Customer feedback from franchisees.

Disadvantages:

 Brand risk if franchisee underperforms.

 Support costs.

 Potential disputes.

For Franchisee

Advantages:

 Lower failure risk.

 Ongoing training and support.

 Brand visibility.

 Easier bank loans.

Disadvantages:

 Less autonomy.

 Ongoing royalties.

 May have to buy from franchisor only.

 May need franchisor’s approval to sell business.